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Comment: ETFs and outsourced discretionary fund management sound the death knell for multi-manager

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Iain Tait (pictured), Head of UK Private Clients and a Partner with the London-based wealth manager London & Capital questions how much longer traditional multi-manager solutions would be capable of surviving in today’s world of cost-conscious investing…

“Very few private investors – High Net Worths included – have the time or the resources to analyse in any great detail the investment process or the performance track record of investment funds, and they are unlikely to know whether funds have performed through good fortune, taking excessive risk or through good investment management.

“Although the multi-manager approach looks attractive at face value, it invariably fails in its execution, the additional layers of investment management involved attracting an additional layer of fees, whether you deal at institutional rates or not. Total fund TERs in excess of 3% allied with bid/offer spreads in excess of 5% are all too common. The consequence is that the underlying securities held within a multi-manager fund have to outperform by around 3% per annum if the fund is to perform even in line with the indices.”

Tait’s criticisms come in the wake of new research from Defaqto, which shows that outsourced multi-manager solutions are suffering a continuing decline in popularity in the face of the RDR as advisers turn to discretionary investment managers. The number of platform users outsourcing to multi-managers fell from 32% last year to just 23% this year.

Tait is critical of the opaque nature of multi-manager funds. He claims that many investors find it difficult to know exactly what they are ultimately invested in with regards to the underlying funds.

Flying in the face of recent industry criticism, Tait said that efficient asset allocation could be achieved and market exposure delivered far more cost-effectively through a core portfolio of ETFs, direct stocks and bonds, carrying TERs of between 25 and 50 bps. He believes investors should only be paying between 50 to 100bps on third party funds and collectives where appropriate diversification in the portfolios is required. This may be when gaining exposure within less efficient emerging markets or when investing in small and mid-cap firms.

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